Why Angel Investors Eye Startups as “Yummy Chocolate Cake”
What are the things that angel investors look for in a startup? Originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.
All Angel Investors are unique in that they all have different preferences in what they look for in start-ups. That being said here are some common areas to focus your attention.
The Team
Angel investors are more likely to invest in people rather than just ideas. Because of this, angel investors want to do work with someone that they know or someone who can be vetted. Not only does this help with credibility, it establishes trust as well. Also, since angel investors are working directly with the team, it wouldn’t hurt to make sure that personalities click and everyone can get along.
Besides all of the above, angel investors will likely be looking at the entire management or leadership team. Angel investors need to see a team that has a proven track record of delivering goals on time and that can handle all of the responsibilities that come with a startup.
A Completed Business Plan
Make sure that your startup has a clear and completed business plan. This means that everything has to be written out. And that means everything. What’s the problem that’s been solved? What’s the business model? What’s the market like? Who are the competitors? What advantages are there over the competition? How will the investor make money?
Many professional investors share an ideology that an entrepreneur without a business plan is on the path to failure. Of course, just because a business plan is in place doesn’t mean that success is guaranteed. It does, however, illustrate that there’s a market and opportunity to make a return. Make sure that the business is also vetted through market research, surveys, or crowdfunding.
Appropriate Valuation
While there’s no magic number for how much an angel invests, the valuation of a company usually stays the same. For angel rounds it’s typical to see a valuation that is no lower than half a million dollars or higher than five million dollars. So a common valuation would work like this: “If you put $50,000 into a company at a pre-money valuation of $1 million, then the post-money valuation is $1.05 million, and you get .05/1.05, or 4.76 percent of the company’s stock.”
If the valuation is outrageous, then this is a sign an entrepreneur has overvalued his or her startup.
Integrity
Integrity is the number one quality angel investors look for in entrepreneurs. Since everything can, and in many cases will go wrong when investing in a startup, the only thing that is for certain is being able to trust the entrepreneur.
This means investing in entrepreneurs who are thrifty, resilient, determined, and passionate. In other words, the entrepreneur should be able to not only lead the team, set goals, and manage a budget, but also rise to the occasion when times get tough.
Understanding the Risk
An entrepreneur should be passionate, optimistic, and hopeful for the future. However, an entrepreneur should also be realistic. They should understand that there’s a major risk involved for both you and them.
Entrepreneurs who push their startup without respecting the motivation and concerns of an angel investor prove that they just don’t understand the risks that an angel investor is taking in investing in their startup.
